Encompass Submits Plan To Restructure Under Chapter 11
In 2000, GroupMAC merged with Building One Services Corp. to form Encompass Services Corp., a move that Encompass chief executive officer Joe Ivey said “made sense.” In an interview with The News in September of 2000, Ivey said, “Both companies had built very complementary systems across the country. When we put them together, the fit was almost perfect to become a national facilities manager.”
Today, Encompass is attempting to fight off a massive debt load that has forced the company to submit a restructuring plan under Chapter 11 of the bankruptcy code. The company, which employs over 30,000 workers, reported revenues of $3.9 billion in 2001, but according to its 2001 Annual Report, the company still carried a debt load of $815 million. This amount represented a $152 million reduction from the previous year.
The Encompass common stock price continued to drop through early fall of 2002. On Oct. 1, the New York Stock Exchange suspended trading of the common stock of Encompass and notified the company that it would submit an application to the Securities and Exchange Commission to delist Encompass’ common stock.
REORGANIZINGOn Oct. 14, Encompass issued a press release detailing the proposed financial restructuring plan and noting that the company would “solicit approval of its restructuring plan from its creditors.”
In the press release, Ivey said, “With the proposed restructuring, we are pursuing a significant improvement to our capital structure and substantially strengthening our business prospects. This plan, if approved, will significantly reduce our total debt and improve our financial flexibility. Moving forward quickly with this plan should provide Encompass and our stakeholders with the best prospects for realizing the value of the business.”
The proposed financial restructuring plan would eliminate all of the company’s subordinated debt, all of its mandatorily redeemable preferred stock, and a significant portion of its senior debt. It would significantly reduce annual cash interest payments and eliminate dividend obligations.
“We believe that this restructuring plan, if approved, will allow the company to operate its business in the ordinary course, with minimal disruption to our customers, suppliers, and employees, and will provide the company with the opportunity to reach its full potential,” Ivey continued.
“If its solicitation is successful, Encompass intends to implement the restructuring transaction through a ‘pre-packaged’ Chapter 11 filing in order to complete its restructuring in an expedient manner. The proposal contemplates a debtor-in-possession loan facility for the company during the Chapter 11 proceeding. Upon completion of the proposed restructuring, the company expects to receive a new revolving credit facility to fund general corporate purposes and working capital needs, including the issuance of letters of credit.
“Although the company has not received any indication of support from its creditors for the proposed restructuring, it believes this expedited restructuring process will preserve the most value for its creditors and other constituencies, if approved. The company stated that in the event it does not receive the support required from its creditors to implement this plan, it would explore alternate courses of action to preserve the value of the company. The company intends to commence the solicitation of approvals of the proposed plan shortly. The solicitation of approvals would expire 30 days after commencement.”
IVEY PROVIDES PERSPECTIVEIvey responded to questions from The News immediately after the Oct. 14 press release. He was asked about the main reasons leading up to restructuring.
“Encompass has made a tremendous amount of progress over the last several years integrating its businesses and improving operating efficiencies,” he said. “However, we found ourselves with too much debt at a time when the industry was facing its worst economic cycle in decades. That, combined with the post-September 11 fallout and the situation of the ‘dot.com’ and telecom industries, made the environment in which Encompass had to operate extremely challenging.
“Through our proposed restructuring plan, we are pursuing a significant improvement in our capital structure by reducing our debt. In short, we have a balance sheet issue, not an operations issue.”
Ivey was asked if the merger of Building One and GroupMAC had a negative impact on the company’s financial position.
“The debt attributable to the merger itself is relatively straightforward,” he replied. “Other debt is attributable to such things as the decision by Building One and GroupMAC to make cash tender offers, which distributed cash to shareholders but added significantly to the current debt levels of Encompass.”
“As we previously announced, we are already pursuing a program to divest ourselves of certain non-core assets,” he said.
When asked if the restructuring plan would affect future plans to expand Encompass, Ivey replied, “If approved, we believe that our proposed restructuring will substantially strengthen our business prospects and allow us the opportunity to reach our full potential. This restructuring plan is designed to reduce our debt, enhance our competitiveness, and position us for growth and profitability — which is good news for the future of our company, customers, suppliers, and employees.”
For more information on the company's reorganization, visit www.encompserv.com (website).
Sidebar: Comfort Systems USA CEO Sympathizes With Encompass’ WoesHOUSTON, TX — Comfort Systems USA and Encompass Services have a lot in common. They are both headquartered in Houston, they are both companies born out of the consolidation movement in the HVACR industry in the late 1990s, and they share similar commercial and building services markets. The News sought out Comfort Systems USA’s chief executive officer Bill Murdy for some comments on the impending Encompass Chapter 11 restructuring.
“Encompass has some very good components and have shown that they can perform well in the mechanical areas,” he said. “A lot of factors conspired to hurt Encompass, including their exposure to the telecom and datacom areas. We didn’t have those same concerns.”
Murdy said the he has had concerns over the economy in the construction market and people have expressed concerns over Comfort Systems USA balance sheet. But he said his company has “taken care of the problems and now carries no debt.”
In an Oct. 15 press release, Comfort Systems USA announced that it had secured a $55 million credit facility with General Electric Commercial Finance’s Merchant Banking (GE Merchant Banking) unit. “The facility provides up to $40 million on a three-year revolving basis, and $15 million on a five-year term basis,” said the company. “This financing replaces the company’s current revolving credit facility that was scheduled to expire in January 2003. The company and GE Merchant Banking also anticipate expanding the revolving facility to $60 million, and the total facility to $75 million, through a syndication to additional lenders in the future.”
Murdy stated, “We are pleased to embark on a new long-term relationship with an organization as broad and as strong as GE. This facility provides us with both working capital and growth capital, and represents an important vote of confidence in the company’s prospects in the large and growing commercial HVAC industry.
“We have worked hard on improving our cash flow and reducing our debt in order to weather the economic downturn that has come upon the economy — and certainly the construction services industry. Debt was a consequence of how Encompass was structured and they just couldn’t get away from that. This [Encompass] organization plan would substantially reduce that debt.
“This is a tough time for any company, not just Encompass. But I think they can emerge from all of this.”
Murdy does not believe that there will be a rapid turnaround for the construction services economy. But he is optimistic about long-term growth.
“I think we are at the bottom and I believe that, based on our backlog and the work that is out there for us, that things are generally turning up,” he said. “Right now, we are doing very well.”
— John R. Hall
Publication date: 10/21/2002